On 16 September 2008, the Court of Appeal of Colmar (Alsace) ruled that a German debtor could not benefit from French insolvency law, as he had apparently moved to France for that sole reason. Had he followed the advice of http://www.insolvenz-frankreich.de ?

I understand that under German law, insolvency proceedings do not have the effect of immediately cancelling debts. By contrast, under French law, insolvency proceedings result in the immediate cancellation of all debts, irrespective of whether the liquidation of the assets was sufficient to pay creditors. The Colmar court specifically insisted that the goal of the German debtor was to benefit from this rule of French law.

The German debtor had allegedly moved to France in 2005. He waited for two years before filing for insolvency in Strasbourg in November 2007. He then claimed that he lived in France and worked there part-time for a French company. He also claimed that he had become insolvent as he owed €56,000 to a German company. At a later stage, he added that he also owed €155,000 to German tax authorities. He alleged he had no assets.

Now, this did not really convince the court, for a variety of reasons:

1. The French company was not paying him much (€600), and he was not really able to explain in court what his job there actually was.

2. German tax authorities were seeking payment of taxes for years 2005, but also 2006 and 2007, which was hard to reconcile with the claim that he had not worked in Germany during that time. Indeed, he admitted that he was still registered as an auditor there.

3. The German company to which he owed €56,000 had its seat at his address in Germany, in Wissembourg.

4. A garage from Haguenau had notified him with an injunction of payment, which was hard to reconcile with the claim that he had no assets, and in particular no car.

5. Finally, he had allegedly moved to France at the very moment when he had received a notification of debt from the German tax authorities. Strange coincidence, really. Did he make up the other € 56,000 debt to conceal that the point was to avoid paying the tax debt?

Until recently, French law did not provide for insolvency for individuals. This was different in Alsace – Lorraine, which always kept that possibility even after it became French again after the war. There is thus a special provision in the French commercial code which provides that all individuals domiciled in Moselle, Haut-Rhin and Bas-Rhin can enjoy the benefit of insolvency, but only if they are in “good faith” and “notoriously insolvent” (Com. code, art. L. 670-1). The Court found that he was not in good faith, and thus that the requirements under French insolvency law were not met. This means that, thanks to this substantive provision of French insolvency law, the Court did not have to discuss whether there had been any fraude à la loi, the traditional concept used by French conflict scholars to tackle strategic behavior of this kind.

Finally, the application of the European Insolvency Regulation was not discussed.

Let’s hope that the ECJ doesn’t hear about art. L. 670-1, and French judges ask no questions. The Court would be too tempted to say that circumventing national rules in this way, is “inherent” to the single market.

I would like to add a German perspective to the ongoing discussion: According to German bankruptcy law (sec.287 (2) Insolvency Code), the debts of an individual are waived after a period of six years from the opening of the insolvency proceedings. Due to this relatively long period of time German insolvency debtors have used the Insolvency Regulation to forum shop. The first prominent case was the Staubitz-Schreiber case before the ECJ (ECJ, case C-1/04, ECJR 2006 I-706). The German debtor moved from Wuppertal to Spain after she had filed her application for the opening of insolvency proceedings. It must be noted, however, that in this case the German courts – not the debtor – wanted to transfer the competence for the proceedings to their Spanish colleagues. Mrs. Staubitz-Schreiber simply preferred to live in Spain for the six years of the German insolvency proceedings.

France (i.e. Alsace-Lorraine) has become a popular place for German debtors who want to escape from the long six year period prescribed by German insolvency law. On the internet, there a many “providers” offering their advice and help to interested debtors. A quick “google” search for the words “Insolvenz”, “Schuldenberatung” or even “Frankreich” – generates a great number of such services. The common language in the French-German border region serves as an additional incentive for forum shopping. In my opinion, the judgment of the Colmar Court of Appeal seems to be in line with the general practice of the French courts in the Alsace region which scrutinize very carefully whether the German debtor really (and not only allegedly) has moved from Germany to France. It remains to be seen whether this judgment will bring a halt to the growing “bankruptcy tourism” between Germany and -France. Additionally, it is worth noting that German courts have decided the issue similarly: Last November, the Bundesgerichtshof held that the COMI of a German debtor was Germany although the debtor asserted that he had moved to France. The court found that this was irrelevant as the debtor had moved to France after the application for opening the insolvency proceedings which is the decisive moment for the determination of the COMI. A previous court in this case mentioned the “Scheinsitzverlegung” of the debtor. The Bundesgerichtshof did not address this issue (BGH, 11/13/2008, IX 201/07, similar decision on 7/5/2007, IX ZB 233/05).

Lastly, I would like to make a short remark on Andrew’s post: It is not surprising that our English friends are offering similar opportunities for insolvency shoppers. In this respect, England is still an undiscovered area in Europe – maybe due to the (correct?) impression that London is the European capital of commercial (high value) litigation. Nevertheless, some Germans have discovered the advantages of the English insolvency laws. Recently, the Bundesgerichtshof held that an English discharge order must – as a matter of principle – be recognised in Germany (BGH, 9/28/2008, IX ZB 205/06). In this case, the German debtor, a lawyer from Dresden“ (calling himself an expert in insolvency and restructuring), moved to London where he immediately applied for a discharge order. In the garnishment proceedings, his German creditors were not pleased to learn that a court in London had released their debtor from his obligations. The BGH held that the garnishments could be set aside under section 767 of the German Code of Civil Procedure. However, the Senate neither mentioned the Insolvency Regulation nor answered the question whether the German creditors had been informed about the proceedings in London which is a prerequisite for the recognition of a discharge order under Articles 16 and 17 of Reg. (EC) 1346/2000 according to the ECJ in Eurofood (Case C-341/04, para 60). This example shows that the application of Regulation (EC) 1346/2000 is difficult and offers plenty of possibilities for smart insolvency shoppers.